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When Bubbles Burst: Surviving the Financial Fallout

John P Calverley, Nicholas Brealey Publishing, 2009, 248 pages, £12.99.

Plenty of people have had plenty to say about the global financial crisis, and John Calverley has made an interesting contribution to the genre in this revised and updated version of a book originally published in 2004.

He provides a well-informed and eclectic account of what went wrong, and puts particular emphasis on the capacity of human beings to delude themselves about asset valuations, even when there is what he regards as clear evidence that the valuations are grossly in error. In truth, and with the benefit of hindsight, it is not all that difficult to think of many plausible reasons why so many things went wrong. They are not mutually exclusive, so that there is no need to apply Occam’s razor to them. It is much more difficult, and much more important, to come up with good ideas about what exactly ought to be changed in response to the current crisis, and about who exactly ought to change it. Something will have to change, because public opinion will insist on it.

Most of the suggestions made so far relate to regulation. For example, it looks as if the regulation of financial companies in the UK is to be made tighter and indeed frightening to the regulated, though it is not clear that more of the same kind of regulation will help. Another suggestion is that micro-prudential regulation of individual financial companies should be supplemented by macro prudential regulation of the financial system as a whole, enforced by means of a new policy instrument which has not yet been fully specified. A third proposal, more promising in this reviewer’s opinion, is for an enforced Glass-Steagall type of separation between commercial banking and investment banking.

In this book John Calverley puts forward a different idea, namely that there should be an official Asset Valuation Committee: “An experienced group of financial experts to study fundamental trends in stock and property prices and identify reasonable long-term valuation ranges. The committee could include a mix of central bankers, academics and financial practitioners. If and when it judged that asset prices were moving out of these ranges, it could issue public warnings.” This proposal differs from the others in that it would modify the result of the market process – namely market prices – rather than influence the conduct of the process through regulation of financial companies. It would be a formalisation and routinisation of a role which central bankers have, with great reluctance, taken on from time to time. Alan Greenspan’s famous warning in 1996 about ‘irrational exuberance’ was presumably just the kind of statement that an official committee might have issued.

It is easy to see all kinds of practical problems with the idea – for example, at what level of detail would they opine on asset prices. The equity market as a whole? Individual industries? Individual companies? What happens if – or rather when, for it certainly would happen – the committee appears to make a misjudgement, as Mr Greenspan appeared to have done for over a decade after 1996?

The bigger issue, though, is the idea that asset valuation should be delegated to a group of established experts, who will be older and therefore presumed to be wiser than the market average. One of the most attractive qualities of capitalism, and one that makes it acceptable to the public at large, is that it has the capacity to overturn the conventional wisdom of established experts. Empowering established experts yet further would be extremely dangerous.

Bill Allen

The Euro: The Politics of the New Global Currency

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